Gap to separate Old Navy, close stores; shares jump

Gap Inc. will separate Old Navy into its own publicly-traded company and create a new, now unnamed firm to house the remaining brands in its portfolio, including Gap and Banana Republic.

"The remaining specialty fleet will serve as a more appropriate foundation for future growth of the brand across the specialty, outlet and online channels", Gap wrote in its earnings report.

In January, M&S announced it was closing 17 stores as part of plans to shut 100. "There will be a healthier channel mix after the restructuring, with almost 40% of sales coming from online, and the remainder split fairly evenly between the specialty and value channels".

Gap's shares were up more than 20 percent on the news in after-hours trading Thursday.

The split up, which followed a comprehensive board review, comes as Old Navy has been thriving, while Gap still hasn't been able to regain its footing despite numerous attempts to fix the business.

Cheaper fast-fashion brands such as Zara, H&M and Forever 21 now attract younger shoppers and Gap's sales have been falling in recent years.

Gap plans to spend $750 million in 2019 on capital expeditures - including $100 million to build out its OH supply center and headquarters - and sell the main Old Navy office. "But for the Gap, this seems like potentially a last significant effort to help the brand find its place in a market where it has lost relevance".

Gap's overall same-store sales fell 1 percent in the fourth quarter ended February 2, compared to analysts' average estimate of 0.3 percent rise, according to IBES data from Refinitiv.

Old Navy, meanwhile, has been a bright spot in Gap's portfolio, which also includes Athleta, Banana Republic, Intermix, and Hill City.

FILE PHOTO: Customers arrive to shop at an Old Navy store in the Brooklyn borough of New York June 15, 2015.

"It's clear that Old Navy's business model and customers have increasingly diverged from our specialty brands over time", Gap's Chairman Robert Fisher said.

Gap's current CEO, Art Peck, will hold the same position at the new company after the separation.

"It makes sense to us that Old Navy spins off, with the edge in our view going to Old Navy, driven by Old Navy's strong brand equity, newly increased focus, as well as increased management incentives", said Wedbush analyst Jen Redding. The new company that Peck will run has about $9 billion in annual revenue.

"We're confident these closures will play an important role in revitalizing the brand", the Gap Inc.

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